EMI: Private Equity Boss Guy Hands' EMI Memo Decoded

Terra Firma’s Guy Hands, the proud new private equity owner of EMI, sent a company-wide memo to employees yesterday. It’s a long one — 1,212 words! Full missive after jump, but for readers with day jobs, here’s an excerpt and translation. Summary: There are going to be fewer jobs around here.

The first leg of the triangle … should be EMI’s position and relationship with its consumers, be they B2B or B2C. We need to communicate with them… and ensure that we are not purely reliant on others to do so…We also need to focus on how we can develop a direct relationship with consumers and not rely on or blame others.

Translation: It’s staggering how little big music labels know about their customers. Figure out how to fix that and you can keep your job…

The second leg of the triangle is EMI as an organisation… there is not currently a universal culture of working together. This is not the fault of the individuals within EMI, but is due to a compensation and management system put in place over the last 20 years which does not encourage the right behaviours or reward the right actions.

Translation: Want to stick around? Follow new marching orders and get ready for a pay cut.

The third leg of the triangle is the artist and the artist’s representatives … if we offer better products and have the right culture … then we will be able to attract, retain and develop the very best artists. Additionally … there is no reason why we should not be more selective in whom we choose to work with. There has been a lot of talk about what labels offer to artists and to the consumer. However, there is not much talk about how artists should work with their label… some unfortunately simply focus on negotiating for the maximum advance…advances which are often never repaid.

Translation: We’re not going to beg Radiohead to work with us, and we’re going to put less money into Allen Grubman’s hands.

As you know better than me, the music industry lends itself to media commentary which is at best speculative and to advise you to take much of what is written with a pinch of salt.

Once we have pulled together a coherent, high-level vision, we will hold a series of meetings to brief the management teams around the world. We will then roll out the agreed vision to individual employees in a series of town hall sessions similar to those held in September/October. The timeframe for all of this will be early 2008.

Translation: We have no clue yet how we’re going to fix this place and get our required rate of return–but we’re working on it. We can’t do massive layoffs now, because we need all of your help selling CDs in Q4. But hold off on racking up a big credit card bill during the holidays.

FULL MEMO

Dear all:

I want to thank all of those whom I met on my recent trip to the United States for making me so welcome. I found it incredibly stimulating and encouraging. EMI has a huge number of highly skilled and dedicated people and it is my job to ensure that this enormous potential is unlocked. There were a few particular questions I was asked on the trip which may be of interest to many. Let me take each of them in turn:

My initial views on what we need to do to make EMI recorded music successful:

Clearly after only a few weeks’ involvement with EMI, this is not something on which we can as yet give great detail. However, I do see a need for fundamental change in how we approach the music business and how we deliver the interconnected triangle of the consumer, EMI and the artist.

The first leg of the triangle, in my view, should be EMI’s position and relationship with its consumers, be they B2B or B2C. We need to communicate with them, understand fully what we can provide them with, and ensure that we are not purely reliant on others to do so. Technology should be seen as an enabler, rather than a threat to our long-term economic success and, as I have said before, we need to embrace it.

We also need to focus on how we can develop a direct relationship with consumers and not rely on or blame others. If we do this throughout EMI (and in parts of the business, we are already doing so very successfully), we will find ourselves being in demand from artists as we will be able to give them solutions that will help them both increase their revenues and additionally protect and develop their artistic integrity. Please feel free to send me any ideas you have on products or services involving music that could be appropriate for either B2B or B2C channels that EMI could provide.

The second leg of the triangle is EMI as an organisation. While individually there is incredible strength within the organisation, there is not currently a universal culture of working together. This is not the fault of the individuals within EMI, but is due to a compensation and management system put in place over the last 20 years which does not encourage the right behaviours or reward the right actions. However, I am hugely encouraged that most of the people I have met want to work together with great enthusiasm for the good of EMI and of music generally. What worries me is that the existing structures have been put in over a couple of decades and unpicking them in a way that releases the good in the company is not going to happen overnight.

The third leg of the triangle is the artist and the artist’s representatives. Here, I believe that if we offer better products and have the right culture which has at its core honesty, transparency and performance, then we will be able to attract, retain and develop the very best artists. Additionally, at the point where we are really world-class in the service we are offering to artists, there is no reason why we should not be more selective in whom we choose to work with. There has been a lot of talk about what labels offer to artists and to the consumer. However, there is not much talk about how artists should work with their label. While many spend huge amounts of time working with their label to promote, perfect and endorse their music, some unfortunately simply focus on negotiating for the maximum advance…advances which are often never repaid. However, once EMI has the best products and services in music and the best culture for working together then, as already exists within some of our labels, it will be open to us to choose which artists we wish to work with and promote.

Hiring of new people for EMI?

Whenever Terra Firma invests in an industry or business in need of transformation, we seek new people–both inside and outside of the industry–in order to inject into the business fresh perspectives on different business models that might drive further revenues and services
or reduce costs. When we acquired EMI, we broke this search down into five groups:

* Current executives in the major labels
* Former executives in the major labels
* Executives and entrepreneurs in the music industry not attached to major labels
* Senior professionals in the entertainment and media industries and
* Executives in other industries.

In the first two categories, while we have interviewed and seen many people, we have not seen many who, in our view, add anything over and above those we already have in EMI. The other three categories, however, do have people who could add additional skills and experience to that which already exists within EMI and we expect to hire people from these categories to work with current EMI people and to advise Terra Firma on how to put new products and services into EMI’s offering. However, I should add that the press speculation with regard to them taking very senior management roles at this time is completely false.

I might also take the opportunity to add that, as you know better than me, the music industry lends itself to media commentary which is at best speculative and to advise you to take much of what is written with a pinch of salt. Only this week as an example, we have seen one U.S.-based newspaper suggest that Terra Firma selling a small part of its equity in EMI was somehow significant. If they had bothered to do a little research, they would have found that in all major private equity deals, equity is sold by private equity managers, to their investors and other private equity firms. Indeed, Terra Firma has done this on all previous deals it has done and it is something we proactively market to our investors. Importantly, however, EMI is Terra Firma’s largest investment and Terra Firma will continue after the sell down is completed (which in the past on previous deals has on occasion taken upto 18 months) to hold a substantially higher proportion of its fund in EMI than we are aware any other private equity firm has with any other investment. Similarly any suggestion as to what may or may not come out of the strategic review we are conducting should be seen as just that, speculative suggestion and nothing more.

Further communication on Terra Firma’s vision:

We are continuing to refine and develop our vision for EMI. There has been, and continues to be, a fantastic response from both the employee and artist communities to our consultation on the future vision for EMI. The Investor Board are working hard on bringing together all the ideas and suggestions and evaluating them. Once we have pulled together a coherent, high-level vision, we will hold a series of meetings to brief the management teams around the world. We will then roll out the agreed vision to individual employees in a series of town hall sessions similar to those held in September/October. The timeframe for all of this will be early 2008.

Please feel free to come back to me with any questions or comments.

With best wishes
Guy

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